EEF blog

This week we’ve been blogging about the how the Chancellor could set out a stronger, clearer strategy for growth at this year’s Budget.

So far we have set out three bold ambitions for 2015, and associated measures of progress, that we think would form the core of this stronger vision:

• More companies bringing new products and services to market;
• More globally-focused companies choosing to expand in the UK;
• A more productive, more flexible labour force.

The final ambition we have is to have a lower cost of doing business in the UK.

High regulation, energy, and tax costs discourage job creation in the UK. These costs also have a deadweight effect, creating a high baseline cost of servicing human resources and compliance processes which detract from the productive capacity of business.

Lowering the cost of doing business in the UK will help existing firms to succeed in international markets and attract new ones to locate here.

The government already does have some ideas in this space for example with its one-in, one-out policy on regulation or its commitment to have the lowest corporate tax rate in the G7.

But UK businesses need to see the government commit to going further.

A firmer commitment is needed to cut the burden of regulation. Merely stemming the flow of cost in regulations is not enough. We want to see a reduction of 10% in the time and money spent complying with domestic regulation.

We also need to address the long-term deterioration in the competiveness of the UK’s electricity prices. It’s fine to want to develop the green economy but why does it have to be at the expense of UK industry? Since 2006 the UK’s largest industrial consumers have paid 19% more than the EU average.

The Chancellor needs to make good on his call to not extend ourselves further than our European competitors, we want to see him go slightly better and commit to having industrial electricity prices below the EU average.

Our competitors are also constantly seeking to improve the competitiveness of their tax systems, we need an ongoing effort to hit what will continue to be a moving target.

As mentioned above this is an area where the government is making some good progress on headline corporate tax rates. But creating yhe most competitive tax system in the G20 must be on a range of measures well beyond the headline rate of corporation tax.

It needs to include areas like support the tax system gives for R&D or capital investment and how our system taxes jobs too.

These three key areas – regulation, electricity prices, and tax – form the basis of our ambition to have a demonstrably lower cost of doing business in the UK in 2015 compared with 2010.

Together with the other three ambitions and associated measures, this forms EEF’s proposal for a clearer, stronger strategy for growth. We hope the Chancellor responds with vigour in his Budget speech on Wednesday.

The government often makes the case for its climate policies by pointing out that, as well as being essential on environmental grounds, they are in the financial best interests of energy consumers.

The argument goes that weaning ourselves off coal and gas will reduce our exposure to ever more volatile and expensive fossil fuels.

So far, so plausible? Well, it’s certainly one possible scenario. But opinion is divided, with some seeing it as massive gamble on the future of fossil fuel prices.

What’s most worrying for manufacturers is that, according to government analysis published alongside this week's Annual Energy Statement, there will be no upside for them, however fossil fuel prices pan out, for at least the next twenty years.

The table below is an extract from yesterday’s analysis. It shows that the best case scenario for businesses is that the government’s policies will ‘only’ push up their electricity prices by 26% in 2020 and 29% in 2030.

The worst case scenario is truly alarming - policies will push up their by 51% in 2020 and 58% in 2030.

To recap, whatever happens to fossil fuel prices, if they go up or down, government policies will mean that businesses pay substantially more for their electricity.

This sounds less like a gamble, and more like a sure-fire way to place a losing bet.

Surely there must be a better way? A way cut to emissions without consumers being forced to pay such a high price?

EEF believes there is and in the second of our series of ‘Green and Growth’ reports, due to be published on 13 December, we will be setting out our alternative vision. Watch this space.

I wrote last week about the GIB and possibilities for removing it from the public sector balance sheet if the Government found that unpalatable.

I was trying to stress the importance of scale and why establishing an institution that could leverage additional funding from capital markets may be important if the GIB is to achieve the quantity of investments being discussed.

To maximise its leverage of such sources, the GIB needs to be adequately capitalised. The Government’s £1 billion is too little but realistically it can’t put in much more (asset sales excepted) in its current fiscal position. The bond holding I discussed last week was about funds for investment. So how could we attract private equity in to capitalise the GIB to allow this leverage in the first place?

The problem is that the GIB is not going to generate a high enough return, at least initially. Private equity investors will be put off by having to wait 10-20 years for a decent return, rightly suspicious that the Government will encourage low, no, or negative profits to support its public policy aims.

That’s where bribery or force might have to come in. How could the government encourage or coerce private investors to provide equity to get the GIB capitalised?
The GIB Commission discussed possible compulsory siphoning off of parts of the Bank Levy or auction proceeds from emission permits. But really this is just another way of increasing Government expenditure on the GIB as this funding is currently destined for the consolidated fund. What’s more it would potentially be inefficient if the hypothecation is ‘hard’ i.e. spending is actually determined by the fluctuating flow of the revenue.

Another way could be to provide a tax rebate inversely related to the regulated price of carbon.

For the private sector to properly incorporate climate change considerations into its decision-making the externality needs to be fully internalised, all gases, all sectors. To smooth the costs of adjustment, maintain UK competitiveness, and for straight out political expediency the Government may understandably not wish to jump to this solution either right away or unilaterally.
So the Government could estimate the difference between the price they put on carbon and the higher average cost of abatement if all gases and sectors were included. This difference could then be used to calculate a rebate for equity investments in the green bank.

As the climate regime strengthened and extended, approaching the ideal, the case for government support for green investment would become progressively weaker. Thus the tax rebate would reduce, approaching zero as the cost of carbon becomes fully internalised in the economy.

So, for example if there was a carbon tax of £5/tonne CO2e and the estimated all gases, all sectors average abatement cost was £10/tonne, then the cost is 50% internalised. Equity investors in the GIB would then be eligible to make 50% of their investment tax deductible. This would be an immediate and sizeable return for investors that might encourage them to contemplate on what may seem an otherwise long and risky proposition.

Unfortunately this re-emphasises the symbiosis already event between a coherent climate and energy policy and the GIB. The tangle of different Government regulations and taxes striking at a price on carbon is complex, too complex to calculate a single price and create a rebate scheme as described above.

The Government needs to consolidate this landscape into a consistent and predictable carbon price. This is essential not just for contemplating back of the envelope schemes like I've just outlined but, much more fundamentally, to reduce and eventually eliminate the regulatory/political uncertainty which is the real barrier to major green investment. Without action here the GIB will not succeed.

I attended Government’s “Low Carbon Industrial Strategy Summit” on 6^th March, and couldn’t help but feeling a little underwhelmed. 

A heavy-weight team, fronted by Messers Brown, Mandelson and Miliband, set out a vision that was full of fine words about how the British economy can benefit from the transition to a low carbon economy. For example:

 “Our vision is of a UK economy that is at the heart of the huge, multi-trillion pound global market this will create, where businesses in this country are designing, producing, marketing and deploying the goods and services that will shape a low carbon world.”   

But there was nothing new in terms of policy thinking. No indication of how this compelling vision will be turned into reality. Nevertheless, the plan is still to have a fully-fledged low carbon industrial strategy in place by the end of the summer. So between now and then, someone will need to come up with some ideas. 

One of the biggest questions that will need answering is whether the “new industrial activism for a new green industrial revolution” promised by Lord Mandelson will be a continuation of the current policy approach or something more radical. 

Up to now, policy has focused on setting targets and providing financial incentives to reduce emissions, raise energy efficiency and increase use of renewable energy. Think targets for reducing carbon dioxide emissions, subsidies for renewable energy, and emissions trading. The idea is that if policymakers can craft the right “signals”, then the market will respond and low carbon industries will take off in the UK.     

Will this approach actually deliver on its promise? It is certainly part of the solution. But remember countries around the world have equally ambitious plans for their economies and, in many cases, are devoting considerable resources to achieving them. The goods and services of the much vaunted low carbon economy could quite easily be supplied from overseas. The UK wind energy market is testament to this.  

So government needs to be bolder. Having an industrial strategy should mean having a clear idea of what type of industries you want to encourage, creating an environment in which they can flourish, and using the policy levers available to speed their development.  

One place to start is thinking about what factors need to come together to make the UK the best place to do low carbon business. Things like taxation, skills, infrastructure and access to finance are likely to be major considerations for potential investors.  

Government also needs to look at how its £170bn annual procurement budget can be used more effectively to support the development of low carbon technologies and businesses in the UK. 

EEF looks forward to working with government to help answer these questions.